Auto Loan Terms Explained

Not only is buying a car a big decision it can also be confusing and intimidating. Knowing some of the common auto loan terms can make the process a little less scary.

Term Length

The term length is the amount of time you have before your loan hits the maturity date or the date the loan must be paid off. The term length is usually expressed in months, such as a 48-month term. Get approved for a no credit check auto loan here.

Term lengths typically range between 24 and 84 months. Most buyers choose loan lengths of either 36 or 48 months. Longer term lengths are becoming increasingly popular.

A longer-term loan typically means lower monthly payments. But with lower payments, you will be paying more to the bank in terms of finance charges. So unless you must choose a longer-term loan, it is recommended that you choose the shortest loan feasible.

It is possible to choose a longer-term loan and pay it off early but some lenders charge an early termination fee. You are also paying the bulk of the interest rate charges in the initial years of the loan.

If you do need to choose a longer-term loan, keep in mind that you may be able to refinance your loan for a more favorable one later.

Down Payment

The down payment is the initial deposit you make to the car seller. Although the down payment is not part of the loan, it does affect it.

Some buyers use their trade-in as their down payment. Other buyers opt to pay the down payment with cash or check. Or a combination of both trade in and cash or check may be used.

The big question is, how big should your down payment be? According to many financial advisors, your down payment should be as much as you can reasonably afford. The bigger the down payment, the smaller a loan you will need, and the more money you will save overall.

A down payment ultimately means you’ll need to borrow less, but a large down payment also acts as a show of good faith to lenders and can result in a more favorable auto loan. Most experts recommend that your down payment be a minimum of 20 percent of the purchase price of the car.

Trade-in

If you have a car you are interested in trading in, your first question should be is the car seller interested in buying your car?

Trade-ins are perfect to use as your down payment, but keep in mind that if you are selling your car to a dealer you may get a lower price than if you sold to an individual buyer. If you do sell to an individual you can still use that money as a down payment.

Upside Down

Being upside down means you owe more on your car than its blue book or fair market value. Because of the large depreciation cars experience during their first few months.

A great way to avoid getting yourself in the upside-down trap is to pay a large down payment. If you make a 20 percent deposit and your car depreciates by 25 percent during the first several months, you won’t be upside down for long.

Amortization

Amortization means paying a debt through installments, such as with a car loan.

Amortization tables break down the principal and the interest you’ll pay each month throughout the life of the loan, as well as showing your remaining balance. This table will allow you to see how the initial loan payments are heavily weighted towards paying the interest instead of the principle.